- Performance Apparel constitutes 59% of the Trefis price estimate for Under Armour's stock.
- Footwear constitutes 18% of the Trefis price estimate for Under Armour's stock.
- Licensing constitutes 9% of the Trefis price estimate for Under Armour's stock.
WHAT HAS CHANGED?
- Under Armour Tops Estimates in Q2
Under Armour delivered a robust performance in its fiscal second quarter, with the company beating consensus estimates on earnings and revenues. Overall, Under Armour's revenues for the quarter increased 91% year-over-year(y-o-y) to $1.4 billion, driven by a 101% increase in North American sales. Its wholesale revenues increased 157% y-o-y to $768 million and direct-to-consumer revenue increased 52% to $561 million during the quarter. By geography, North America revenue increased 101% in Q2 to $905 million and international revenue increased 100% to $446 million, during the quarter. The company's gross margin increased 20 bps to 49.5% of sales compared to a year ago, driven primarily by benefits from pricing and changes in foreign currency, offset by channel mix, and the sale of the MyFitnessPal platform, which carried a higher gross margin rate. In addition, Under Armour swung to a profit of $59.2 million, or 13 cents per share, from a loss of $182.9 million, or 40 cents per share, a year earlier.
- Outlook Raised For FY 2021
Management raised its revenue outlook for 2021 to a low-20s percentage y-o-y increase, replacing the previous high-teen increase guidance. The GAAP earnings per share forecast were also raised to range between $0.14 to $0.16, replacing the previous guidance of $0.02 to a loss of $0.04.The company also sees full-year adjusted EPS of $0.50 to $0.52 vs. $0.28 to $0.30 prior view and $0.33 consensus.
For its fiscal third quarter, Under Armour expects sales to be up a low single-digit rate. For the fourth quarter, it is calling for revenue to be relatively flat compared with 2020 levels.
- Under Armour Turnaround Plan Snapshot
The athletic apparel and footwear retailer has evolved its business to rely less on discounters and department stores and more on its own stores and online during the pandemic. Its goal has been to position the brand on a more premium level next to peers like Nike and Lululemon. In April 2020, Under Armour detailed a new $550 million to $600 million restructuring plan in order to increase its profits and cash flow. Throughout the plan thus far (as of Q2 2021), the company has realized 483 million of pre-tax restructuring and related charges. For the third quarter, it expects to realize approximately 40 to 50 million in charges related to this plan.
- Direct To Consumer Channel Sees Steady Growth
Further, after taking a massive hit on the wholesale front in 2017, Under Armour decided to up its investment in its direct-to-consumer channel. These revenues accounted for 40% of sales in 2020. The financials were driven by continued strong results in its international and e-commerce businesses. With continued efforts, we expect this figure to expand in the coming years.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Under Armour's value that present opportunities for upside or downside to the current Trefis price estimate:
- Retail Apparel Revenues : Under Armour's Retail Apparel Revenues declined from $1019 million in 2017 to around $893 million in 2020. The first signs of trouble emerged in early 2017 when its quarterly top-line growth rates dove to mid-single-digit levels. Under Armour's once-formidable North America segment (~60% of total sales) became an Achilles heel as its sports performance-based apparel fell out of favor.
Unwilling to adapt to the consumer trend toward everyday athleisure wear, such as the products sold by Lululemon, the North America segment experienced sales declines of 5% and 2% in 2017 and 2018, respectively. That said, the company has suffered heavily in a slowing apparel market which was aggravated by the pandemic.However, we expect the figure to increase gradually, crossing the $1.2 billion in the long run. If revenues decrease to $900 million due to a slower-than-expected apparel market growth in the U.S., it will imply nearly 5% downside to the Trefis estimate.
- Apparel Gross Profit Margin: Under Armour's Apparel Gross Profit Margin has stayed in the region of 43%-49% historically, despite the downward pressure of increased competition, the negative impact of currency fluctuations, and increased air freight costs. The company has been able to consistently introduce new products and increase its average unit prices, which has helped sustain margins. Going forward, we expect this figure to remain stable at 49% in the long run. If margins increase to about 52%, there could be an upside of about 3% to the Trefis price estimate.
Under Armour is a manufacturer and distributor of performance apparel, footwear, and accessories for men, women, and children. The company's products use moisture-wicking fabrics that are engineered in many designs and styles for wear in nearly every climate. The company sells its products worldwide, though a significant percentage of sales coming from North America (about 66% in 2020). The company's distribution includes both wholesale and retail channels. Its products are worn by athletes at all levels, from youth to professional, on playing fields around the globe, as well as by consumers with active lifestyles.
SOURCES OF VALUE
The primary sources of Under Armour's value are its apparel and footwear businesses, and together they contribute around 90% of Under Armour's value, as per our estimate. Apparel is more valuable than Footwear and Accessories businesses for the following reasons:
Market leader in performance apparel market
Under Armour is the current market leader in the performance apparel market with over 70% market share. All three apparel gear lines of the company, i.e., HEATGEAR, COLDGEAR, and COLDBLACK, are extremely popular among professional athletes as well as consumers. However, in the footwear and accessories businesses, Under Armour faces tougher competition from established players such as Nike and Adidas.
Under Armour is expanding its own stores leading to higher overall gross margins due to a shift in sales mix
Gross margins in the direct-to-consumer channel are nearly 30% higher than in the wholesale channel.
Expanding its direct-to-consumer segment is a major focus for Under Armour. The company increased its factory store count in North America to 176 stores in 2020 and continues to focus on e-commerce sales. The retailer also increased the average square footage of its factory stores in 2020, including more product categories within its stores. As direct revenues contribute more to net sales, we expect gross margins to increase.
Focus on the international business
While international sales currently contribute only 34% of Under Armour's net sales (as of December 31, 2020), the company plans to increase this figure further going forward.
The company plans to expand in the key markets of Asia (China, Korea, and Japan), Europe (U.K., France, and Germany), Australia, New Zealand, and Latin America (Brazil, Mexico, Argentina, and Chile) enhance its international business.
Under Armour’s management has always been upfront about its ambition to turn the brand from a purely American to a global one. That ambition received a significant boost late in 2013 with the opening of an Under Armour Experience store in Shanghai’s brand new mall, the Jing An Kerry Centre. This is a highly unusual venture with a unique retail concept: The Experience store features an immersive wrap-around video experience that tells Under Armour’s story. Another store, carrying a collection of Under Armour products, is connected.
Focus on the women's business
Being previously popular for its men's products, Under Armour is now focusing on women's products to enhance its revenues. It is making efforts to elevate its brand image among women customers by altering the retail experience at its stores to suit them.
The company is taking several measures to accomplish this goal. It has expanded its creative talent within the women’s business and altered its product portfolio and retail presentation to suit the tastes of female customers. Additionally, the retailer has also signed endorsement deals with female athletic and fitness icons such as Misty Copeland, Gisele Bundchen, and Lindsey Vonn.